----

----

**UNITED      STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

**(Mark      One)**

| þ | **QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934** |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|

**For      the quarterly period ended **
**June      30, 2008**

**or**

|   |                                                                                                                                      |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
| o      | **TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934** |

**For      the transition period from **
**                    t**
**o      **
**                    **

**Commission      File Number: 000-32925**

**AVATAR      SYSTEMS, INC.**

**(Exact      Name of Registrant as Specified in its Charter)**

| **Texas**                                    |   | **75-2796037**                                                            |
|---------------------------------------------------|--------|---------------------------------------------------------------------------|
| **(State                of Incorporation)**  |   | **(I.R.S.                Employer Identification                Number)** |

**2801      Network Boulevard**

**Suite      210**

**Frisco,      Texas 75034**

**(Address      of Principal Executive Offices)**

**(972)      972-1800**

**(Registrant’s      Telephone Number, Including Area Code)**

**Indicate      by check mark whether the Registrant (1) has filed all reports required to      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934      during the preceding 12 months (or for such shorter period that the      Registrant was required to file such reports), and (2) has been subject to      such filing requirements for the past 90 days.**

**Yes      **
**þ**
**      No **

**Indicate      by check mark whether the registrant is a large accelerated filer, an      accelerated filer, a non-accelerated filer, or a smaller reporting company.      See      the definitions of “large accelerated filer,” “accelerated filer’ and “smaller      reporting company” in Rule 12b-2 of the Exchange Act. **

| **Large                accelerated filer o** | **Accelerated                filer o**              |
|----------------------------------------------|-----------------------------------------------------|
| ** **                                   | ** **                                          |
| **Non-Accelerated                filer o**   | **Smaller                reporting company þ** |

**Indicate      by check mark whether the registrant is a shell company (as defined in      Rule 12b-2 of the Exchange Act).**

**Yes      **
**o**
**      No **

**Indicate      the number of shares outstanding of each of the issuer’s classes of common      stock, as of the latest practicable date.**

| **Class**                               |   | **Outstanding                at August 13, 2008** |
|----------------------------------------------|--------|---------------------------------------------------|
| Common                Stock, $.001 par value |   | 9,038,152                                         |

----

----

----

| **PART                I. FINANCIAL INFORMATION**                                                                                  | **1**  |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                              |   |
| Item                1. Financial Statements                                                                                       | 1      |
| Item                2. Management’s Discussion and Analysis of Financial Condition and Results                of Operations | 7      |
| Item                4T. Controls and Procedures                                                                                   | 17     |
|                                                                                                                              |   |
| **PART                II. OTHER INFORMATION**                                                                                     | **17** |
|                                                                                                                              |   |
| Item                1. Legal Proceedings                                                                                          | 17     |
| Item                2. Unregistered Sales of Equity Securities and Use of                Proceeds                                 | 17     |
| Item                3. Defaults Upon Senior Securities                                                                            | 17     |
| Item                4. Submission of Matters to a Vote of Security Holders                                                        | 17     |
| Item                5. Other Information                                                                                          | 17     |
| Item                6. Exhibits                                                                                                   | 17     |
| Signatures                                                                                                                        | 18     |

----

**PART      I. FINANCIAL INFORMATION**

**Item      1. Financial Statements**

Avatar      Systems, Inc.

**BALANCE      SHEETS**

|                                                                                                                                                             |   | June 30, |      | December 31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-----------|-------------------|--------|
|                                                                                                                                                             |   | 2008          |      | 2007              |   |
|                                                                                                                                                             |   | (unaudited)   |      | (audited)         |   |
| **ASSETS**                                                                                                                                                       |   |          |      |              |   |   |   |
| **CURRENT                ASSETS**                                                                                                                                |   |          |      |              |   |   |   |
| Cash                and cash equivalents                                                                                                                         |   | $             | 581,549   |              | $      | 706,772 |   |
| Marketable                securities                                                                                                                             |   |          | 361,468   |              |   | 376,853 |   |
| Accounts                receivable                                                                                                                               |   |          | 266,669   |              |   | 518,376 |   |
| Prepaid                expenses and other current assets                                                                                                         |   |          | 43,790    |              |   | 39,421 |   |
| Deferred                income taxes                                                                                                                             |   |          | 719       |              |   | - |   |
| **Total                current assets**                                                                                                                          |   |          | 1,254,195 |              |   | 1,641,422 |   |
|                                                                                                                                                             |   |          |      |              |   |   |   |
| **PROPERTY                AND EQUIPMENT**,                net of accumulated depreciation of $762,233, and $695,626,                respectively                 |   |          | 336,181   |              |   | 330,925 |   |
| **PURCHASED                SOFTWARE,**net                of accumulated amortization** **of                $1,448,080 and $1,295,101, respectively          |   |          | 1,555,283 |              |   | 1,708,262 |   |
| **SOFTWARE                DEVELOPMENT COSTS,**                net of accumulated amortization** **of                $2,434,214 and $2,236,256, respectively |   |          | 3,499,489 |              |   | 3,273,894 |   |
|                                                                                                                                                             |   |          |      |              |   |   |   |
| **OTHER                ASSETS, net**                                                                                                                             |   |          | 92,786    |              |   | 116,486 |   |
| **Total                assets**                                                                                                                                  |   | $             | 6,737,934 |              | $      | 7,070,989 |   |

|                                                                                                                                               |   |   |      |   |   |      |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|-----------|--------|
| **LIABILITIES,                TEMPORARY EQUITY AND **PERMANENT                STOCKHOLDERS' EQUITY****                                             |   |   |      |   |   |      |   |
|                                                                                                                                               |   |   |      |   |   |      |   |
| **CURRENT                LIABILITIES**                                                                                                             |   |   |      |   |   |      |   |
| Accounts                payable                                                                                                                    |   | $      | 131,327   |   | $      | 200,637   |   |
| Accrued                expenses                                                                                                                    |   |   | 169,126   |   |   | 203,101   |   |
| Line-of-credit                                                                                                                                     |   |   | -         |   |   | 145,067   |   |
| Federal                income taxes payable                                                                                                        |   |   | 99,418    |   |   | 162,385   |   |
| Current                maturities of capital lease obligations                                                                                     |   |   | 17,193    |   |   | 21,016    |   |
| Current                maturities of long-term debt                                                                                                |   |   | 95,300    |   |   | 95,300    |   |
| Current                maturities of notes payable-stockholders                                                                                    |   |   | 120,281   |   |   | 113,174   |   |
| Deferred                revenue                                                                                                                    |   |   | 407,235   |   |   | 568,562   |   |
| Deferred                income taxes                                                                                                               |   |   | -         |   |   | 5,437     |   |
| **Total                current liabilities**                                                                                                       |   |   | 1,039,880 |   |   | 1,514,679 |   |
|                                                                                                                                               |   |   |      |   |   |      |   |
| **DEFERRED                INCOME TAXES**                                                                                                           |   |   | 579,909   |   |   | 569,035   |   |
|                                                                                                                                               |   |   |      |   |   |      |   |
| **OTHER                LONG-TERM LIABILITIES**                                                                                                     |   |   | 78,388    |   |   | 82,792    |   |
|                                                                                                                                               |   |   |      |   |   |      |   |
| **LONG-TERM                DEBT**                                                                                                                  |   |   |      |   |   |      |   |
| Long-term                capital lease obligations                                                                                                 |   |   | 15,879    |   |   | 23,723    |   |
| Long-term                debt                                                                                                                      |   |   | 254,936   |   |   | 302,586   |   |
| Note                payable-stockholders'                                                                                                          |   |   | 392,313   |   |   | 454,230   |   |
| Convertible                notes payable-stockholders'                                                                                             |   |   | 280,000   |   |   | 280,000   |   |
| **Total                long-term debt**                                                                                                            |   |   | 943,128   |   |   | 1,060,539 |   |
| **Total                liabilities**                                                                                                               |   |   | 2,641,305 |   |   | 3,227,045 |   |
|                                                                                                                                               |   |   |      |   |   |      |   |
| **COMMITMENTS                AND CONTINGENCIES**                                                                                                   |   |   |      |   |   |      |   |
|                                                                                                                                               |   |   |      |   |   |      |   |
| **TEMPORARY                EQUITY**                                                                                                                |   |   |      |   |   |      |   |
| Common                stock, subject to put rights, 200,000 shares issued and                outstanding                                           |   |   | 101,000   |   |   | 101,000   |   |
|                                                                                                                                               |   |   |      |   |   |      |   |
| **PERMANENT                STOCKHOLDERS' EQUITY**                                                                                                  |   |   |      |   |   |      |   |
| Preferred                stock, $0.001 par value, 10,000,000 shares authorized; none                issued                                         |   |   | -         |   |   | -         |   |
| Common                stock, $0.001 par value; 30,000,000 shares authorized; 8,838,152                shares                issued and outstanding |   |   | 8,838     |   |   | 8,838     |   |
| Paid-in                capital                                                                                                                     |   |   | 2,253,176 |   |   | 2,238,684 |   |
| Retained                earnings                                                                                                                   |   |   | 1,735,010 |   |   | 1,484,868 |   |
| Accumulated                other comprehensive income (loss)                                                                                       |   |   | (1,395    | )      |   | 10,554    |   |
| **Total                stockholders' equity**                                                                                                      |   |   | 3,995,629 |   |   | 3,742,944 |   |
| **Total                liabilities, temporary equity and permanent stockholders'                equity**                                           |   | $      | 6,737,934 |   | $      | 7,070,989 |   |

----

**STATEMENTS      OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

|                                                              |   | Three months ended |      | Six months ended |   |
|-------------------------------------------------------------------|--------|------------------------------|-----------|----------------------------|--------|
|                                                              |   | June 30,                |      | June 30,              |   |
|                                                              |   | 2008                         |      | 2007                       |   | 2008 |   | 2007 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |
| **Revenue:**                                                      |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| Software                                                          |   | $                            | 119,990   |                       | $      | 170,924 |   | $ | 341,544 |   | $ | 314,675 |   |
| Maintenance                                                       |   |                         | 753,097   |                       |   | 651,099 |   |   | 1,511,868 |   |   | 1,277,393 |   |
| Professional                services                              |   |                         | 247,881   |                       |   | 148,752 |   |   | 567,046 |   |   | 325,643 |   |
| Hardware                                                          |   |                         | 33,840    |                       |   | 2,648 |   |   | 40,315 |   |   | 21,961 |   |
| **Total                revenue**                                  |   |                         | 1,154,808 |                       |   | 973,423 |   |   | 2,460,773 |   |   | 1,939,672 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Cost                of revenue:**                               |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| Software                                                          |   |                         | 11,007    |                       |   | 42,201 |   |   | 77,352 |   |   | 102,252 |   |
| Maintenance                                                       |   |                         | 146,155   |                       |   | 111,909 |   |   | 332,706 |   |   | 229,508 |   |
| Professional                services                              |   |                         | 137,246   |                       |   | 53,867 |   |   | 217,956 |   |   | 109,793 |   |
| Hardware                                                          |   |                         | 38,493    |                       |   | 1,990 |   |   | 44,283 |   |   | 18,918 |   |
| **Total                cost of revenue**                          |   |                         | 332,901   |                       |   | 209,967 |   |   | 672,297 |   |   | 460,471 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Gross                profit**                                   |   |                         | 821,907   |                       |   | 763,456 |   |   | 1,788,476 |   |   | 1,479,201 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Operating                expenses:**                            |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| Sales                and marketing                                |   |                         | 56,624    |                       |   | 120,347 |   |   | 138,559 |   |   | 226,258 |   |
| General                and administrative                         |   |                         | 360,810   |                       |   | 313,715 |   |   | 758,927 |   |   | 624,253 |   |
| Amortization                                                      |   |                         | 175,468   |                       |   | 189,747 |   |   | 350,937 |   |   | 379,495 |   |
| Depreciation                                                      |   |                         | 41,020    |                       |   | 51,107 |   |   | 86,277 |   |   | 102,214 |   |
| **Total                operating expenses**                       |   |                         | 633,922   |                       |   | 674,916 |   |   | 1,334,700 |   |   | 1,332,220 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Operating                income**                               |   |                         | 187,985   |                       |   | 88,540 |   |   | 453,776 |   |   | 146,981 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Other                income (expense):**                        |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| Investment                income                                  |   |                         | 4,160     |                       |   | 4,231 |   |   | 11,736 |   |   | 8,463 |   |
| Loss                on sales of marketable securities             |   |                         | -         |                       |   |   |   |   | - |   |   | (15 | ) |
| Interest                expense                                   |   |                         | (51,007   | )                          |   | (69,329 | ) |   | (105,078 | ) |   | (140,947 | ) |
| **Total                other expense**                            |   |                         | (46,847   | )                          |   | (65,098 | ) |   | (93,342 | ) |   | (132,499 | ) |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Income                before income taxes**                     |   |                         | 141,138   |                       |   | 23,442 |   |   | 360,434 |   |   | 14,482 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| Income                tax expense                                 |   |                         | 44,331    |                       |   | 7,970 |   |   | 110,292 |   |   | 4,924 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **NET                INCOME**                                     |   | $                            | 96,807    |                       | $      | 15,472 |   | $ | 250,142 |   | $ | 9,558 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Other                comprehensive income (loss), net of tax:** |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| Unrealized                gain (loss) on marketable securities    |   |                         | (2,222    | )                          |   | 3,998 |   |   | (18,105 | ) |   | 4,521 |   |
| Income                tax expense (benefit)                       |   |                         | (755      | )                          |   | 1,359 |   |   | (6,156 | ) |   | 1,537 |   |
| **Other                comprehensive income (loss)**              |   |                         | (1,467    | )                          |   | 2,639 |   |   | (11,949 | ) |   | 2,984 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Total                comprehensive income**                     |   | $                            | 95,340    |                       | $      | 18,111 |   | $ | 238,193 |   | $ | 12,542 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Net                income per share:**                          |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Basic                and diluted**                              |   | $                            | 0.01      |                       | $      | 0.00 |   | $ | 0.03 |   | $ | 0.00 |   |
|                                                              |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Weighted                average common shares outstanding:**    |   |                         |      |                       |   |   |   |   |   |   |   |   |   |
| **Basic**                                                         |   |                         | 9,038,152 |                       |   | 9,038,152 |   |   | 9,038,152 |   |   | 9,038,152 |   |
| **Diluted**                                                       |   |                         | 9,038,152 |                       |   | 9,822,866 |   |   | 9,079,061 |   |   | 9,799,247 |   |

----

Avatar      Systems, Inc.

**STATEMENTS      OF CASH FLOWS**

|                                                                                                            |   | Six months ended |     |
|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------|----------|
|                                                                                                            |   | June 30,              |     |
|                                                                                                            |   | 2008                       |     | 2007 |   |
|                                                                                                            |   |                       |     |   |   |
| **Cash                flows from operating activities**                                                         |   |                       |     |   |   |   |   |
| Net                income                                                                                       |   | $                          | 250,142  |   | $ | 9,558 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities: |   |                       |     |   |   |   |   |
| Amortization                of software costs                                                                   |   |                       | 350,937  |   |   | 379,495 |   |
| Non-cash                interest expense                                                                        |   |                       | 51,240   |   |   | 64,663 |   |
| Depreciation                                                                                                    |   |                       | 86,277   |   |   | 102,214 |   |
| Loss                on sale of marketable securities                                                            |   |                       | -        |   |   | (15 | ) |
| Stock                compensation expense                                                                       |   |                       | 14,492   |   |   | 7,528 |   |
| Deferred                income tax expense                                                                      |   |                       | 10,874   |   |   | 4,924 |   |
| Changes                in operating assets and liabilities:                                                     |   |                       |     |   |   |   |   |
| Accounts                receivable                                                                              |   |                       | 251,707  |   |   | 184,998 |   |
| Prepaid                expenses and other current assets                                                        |   |                       | (4,369   | ) |   | (3,068 | ) |
| Accounts                payable                                                                                 |   |                       | (69,310  | ) |   | (50,787 | ) |
| Accrued                expenses                                                                                 |   |                       | (33,975  | ) |   | (27,901 | ) |
| Federal                income taxes payable                                                                     |   |                       | (62,967  | ) |   | - |   |
| Deferred                revenue                                                                                 |   |                       | (161,327 | ) |   | (3,675 | ) |
| Other                long-term liabilities                                                                      |   |                       | (4,404   | ) |   | (5,285 | ) |
| Net                cash provided by operating activities                                                        |   |                       | 679,317  |   |   | 662,649 |   |
|                                                                                                            |   |                       |     |   |   |   |   |
| **Cash                flows from investing activities**                                                         |   |                       |     |   |   |   |   |
| Software                development costs capitalized                                                           |   |                       | (423,553 | ) |   | (478,538 | ) |
| Purchases                of property and equipment                                                              |   |                       | (91,533  | ) |   | (25,973 | ) |
| Purchases                of marketable securities                                                               |   |                       | (2,720   | ) |   | (502,557 | ) |
| Proceeds                from sale of marketable securities                                                      |   |                       | -        |   |   | 525,000 |   |
| Net                cash used in investing activities                                                            |   |                       | (517,806 | ) |   | (482,068 | ) |
|                                                                                                            |   |                       |     |   |   |   |   |
| **Cash                flows from financing activities**                                                         |   |                       |     |   |   |   |   |
| Principal                payments on line-of-credit                                                             |   |                       | (145,067 | ) |   | - |   |
| Principal                payments on capital lease obligations                                                  |   |                       | (11,667  | ) |   | (21,974 | ) |
| Principal                payments on long-term debt                                                             |   |                       | (47,650  | ) |   | (60,277 | ) |
| Principal                payments on note payable-stockholders'                                                 |   |                       | (82,350  | ) |   | (68,625 | ) |
| Net                cash used in financing activities                                                            |   |                       | (286,734 | ) |   | (150,876 | ) |
|                                                                                                            |   |                       |     |   |   |   |   |
| Net                increase (decrease) in cash and cash equivalents                                             |   |                       | (125,223 | ) |   | 29,705 |   |
|                                                                                                            |   |                       |     |   |   |   |   |
| Cash                and cash equivalents at beginning of period                                                 |   |                       | 706,772  |   |   | 322,047 |   |
|                                                                                                            |   |                       |     |   |   |   |   |
| Cash                and cash equivalents at end of period                                                       |   | $                          | 581,549  |   | $ | 351,752 |   |
|                                                                                                            |   |                       |     |   |   |   |   |
| Supplemental                disclosure of cash paid for:                                                        |   |                       |     |   |   |   |   |
| Income                taxes                                                                                     |   | $                          | 162,385  |   | $ | - |   |
| Interest                                                                                                        |   | $                          | 53,838   |   | $ | 76,285 |   |
|                                                                                                            |   |                       |     |   |   |   |   |
| Supplemental                disclosure of noncash investing activities:                                         |   |                       |     |   |   |   |   |
| Change                in unrealized gain (loss) on marketable securities, net of                tax             |   | $                          | (11,949  | ) | $ | 2,984 |   |

----

**1.      Basis of Presentation**

**2.      Recent Accounting Standards and Pronouncements**

*Fair      Value Measurements*

*The      Fair Value Option for Financial Assets and Financial Liabilities Including      an      Amendment of FASB Statement No. 115 *
* *

*Share-Based      Payment*

*Business      Combinations *
*Non-controlling      Interests in Consolidated Financial Statements, an amendment of ARB No.      51*

----

**3.      Long-term Debt**

**Long-term      Debt to Financial Institution**

**Note      Payable-Stockholders’**

----

**Convertible      Notes Payable-Stockholders’**

**4.      Temporary Equity**

*Determination      of the Measurement Date for the Market Price of Acquirer Securities Issued      in a      Purchase Business Combination*
*Classification      and Measurement of Redeemable Securities.*

**5.      Stock Option Plans**

|                                                                 |   | Three months ended |    | Six months ended |   |
|----------------------------------------------------------------------|--------|------------------------------|---------|----------------------------|--------|
|                                                                 |   | June 30,                |    | June 30,              |   |
|                                                                 |   | 2008                         |    | 2007                       |   | 2008 |   | 2007 |   |
| Operating                expenses:                                   |   |                         |    |                       |   |   |   |   |   |   |   |   |   |
| General                and administrative (employee related options) |   | $                            | 7,246   |                       | $      | 3,764 |   | $ | 14,492 |   | $ | 7,528 |   |
| Other                income (expense):                               |   |                         |    |                       |   |   |   |   |   |   |   |   |   |
| Interest                expense                                      |   |                         | 24,273  |                       |   | 30,566 |   |   | 50,164 |   |   | 62,930 |   |
| Share-based                expense before taxes                      |   |                         | 31,519  |                       |   | 34,330 |   |   | 64,656 |   |   | 70,458 |   |
| Related                income tax benefits                           |   |                         | (10,716 | )                          |   | (11,672 | ) |   | (21,983 | ) |   | (23,956 | ) |
| Share-based                expense, net of taxes                     |   | $                            | 20,803  |                       | $      | 22,658 |   | $ | 42,673 |   | $ | 46,502 |   |

----

**Stock      Option Activity **

|                                                    |   | Options |      | Weighted                Average                Exercise                Price |   | Weighted                Average                Remaining                Contractual                Term                (years) |   | Aggregate                Intrinsic                Value |   |
|---------------------------------------------------------|--------|---------|-----------|------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                    |   |    |      |                                                                         |   |                                                                                                                           |   |                                                    |   |
| Options                outstanding at December 31, 2007 |   |    | 1,258,477 |                                                                         | $      | 0.528                                                                                                                          |   |                                                    |   |   |   |   |   |
| Options                granted                          |   |    | -         |                                                                         |   | -                                                                                                                              |   |                                                    |   |   |   |   |   |
| Options                exercised                        |   |    | -         |                                                                         |   | -                                                                                                                              |   |                                                    |   |   |   |   |   |
| Options                forfeited                        |   |    | (40,000   | )                                                                            | $      | 0.580                                                                                                                          |   |                                                    |   |   |   |   |   |
| Options                outstanding at June 30, 2008     |   |    | 1,218,477 |                                                                         | $      | 0.527                                                                                                                          |   |                                                    | 5.50   |   | $ | - |   |
| Options                exercisable at June 30, 2008     |   |    | 1,157,477 |                                                                         | $      | 0.528                                                                                                                          |   |                                                    | 5.36   |   | $ | - |   |

**Item      2. **
**Management’s      Discussion and Analysis of Financial Condition and Results of      Operations**

**SPECIAL      NOTE REGARDING FORWARD-LOOKING STATEMENTS**

----

**Three      Months Ended June 30, 2008 Compared to Three Months Ended June 30,      2007**

*Revenue:*

|                                 |   | June                30, |      | Change |   |
|--------------------------------------|--------|-------------------------|-----------|--------|--------|
|                                 |   | 2008                    |      | 2007   |   | Amount |   | %  |   |
|                                 |   |                    |      |   |   |   |   |   |   |
| Software                             |   | $                       | 119,990   |   | $      | 170,924 |   | $ | (50,934 | ) |   | (29.8 | ) |
| Maintenance                          |   |                    | 753,097   |   |   | 651,099 |   |   | 101,998 |   |   | 15.7 |   |
| Professional                services |   |                    | 247,881   |   |   | 148,752 |   |   | 99,129 |   |   | 66.6 |   |
| Hardware                             |   |                    | 33,840    |   |   | 2,648 |   |   | 31,192 |   |   | 1,177.9 |   |
| Total                revenue         |   | $                       | 1,154,808 |   | $      | 973,423 |   | $ | 181,385 |   |   | 18.6 |   |

*Software:*

| ·   | Revenue                from software sales for the quarter ended June 30, 2008 decreased                29.8% to                $119,990 compared with $170,924 from the quarter ended June 30,                2007. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                decrease in software sales was primarily related to a decrease in                sales of                our Integra products of $43,750. Sales of Integra products were very                strong during the second quarter of 2007 as a result of a new version                release. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

| ·   | Maintenance                revenue for the quarter ended June 30, 2008 increased 15.7% to $753,097                compared with $651,099 in 2007. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Maintenance                revenue was impacted primarily by increases in Integra and Petroware                ASP                products of $44,947 and $28,885,                respectively. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in maintenance revenue was primarily related to Petroware                ASP and                Integra sales during the first quarter of 2007 and an increase in                maintenance prices at the beginning of the third quarter of                2007. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

| ·   | Professional                services revenue for the quarter ended June 30, 2008 increased 66.6%                to                $247,881 compared with $148,752 for the quarter ended June 30,                2007. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in professional services revenue included $119,599 for website                design, data conversion and custom programming related to a large                sale                made to a customer during the fourth quarter of 2007. The increase                of                $119,599 was offset by a decrease of $15,248 in training for                Petroware. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

| ·   | Hardware                sales for the quarter ended June 30, 2008 increased $31,192 to $33,840.                Hardware sales for the quarters ended June 30, 2008 and 2007 were                insignificant. The third and fourth quarters of the Company’s fiscal year                are usually when hardware sales are highest. Hardware sales can be                very                large in relation to overall sales of the Company and can impact                net                income positively, but the Company’s profitability is not dependent on                hardware sales. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Cost      of Revenue:*

|                                 |   | June                30, |    | Change |   |
|--------------------------------------|--------|-------------------------|---------|--------|--------|
|                                 |   | 2008                    |    | 2007   |   | Amount |   |  % |   |
|                                 |   |                    |    |   |   |   |   |   |   |
| Software                             |   | $                       | 11,007  |   | $      | 42,201 |   | $ | (31,194 | ) |   | (73.9 | ) |
| Maintenance                          |   |                    | 146,155 |   |   | 111,909 |   |   | 34,246 |   |   | 30.6 |   |
| Professional                services |   |                    | 137,246 |   |   | 53,867 |   |   | 83,379 |   |   | 154.8 |   |
| Hardware                             |   |                    | 38,493  |   |   | 1,990 |   |   | 36,503 |   |   | 1,834.3 |   |
| Total                cost of revenue |   | $                       | 332,901 |   | $      | 209,967 |   | $ | 122,934 |   |   | 58.5 |   |

*Software:*

| ·   | Cost                of software sales for the quarter ended June 30, 2008 decreased 73.9%                to                $11,007 compared with $42,201 for the quarter ended June 30,                2007. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cost                of software as a percentage of the related revenue decreased to 9.2%                for                the quarter ended June 30, 2008 from 24.7% in                2007. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cost                of software sales decreased $31,194 due to lower commissions of $15,889                related to lower software sales and lower software costs that we                purchase                from outside vendors of $13,802. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

| ·   | Cost                of maintenance revenue for the quarter ended June 30, 2008 increased                30.6%                to $146,155 compared with $111,909 in                2007. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cost                of maintenance as a percentage of the related revenue increased to                19.4%                for the quarter ended June 30, 2008 compared with 17.2% in                2007. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in cost of maintenance revenue of $34,246 was related to                an                increase in salaries allocated to cost of maintenance of $41,927                and a                decrease in cost of maintenance on software we purchase for resale                from                outside vendors of $6,444. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

| ·   | Cost                of professional services for the quarter ended June 30, 2008 increased                154.8% to $137,246 compared with $53,867 in                2007. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cost                of professional services as a percentage of the related revenue increased                to 55.4% for the quarter ended June 30, 2008 compared with 36.2%                in                2007. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase of $83,379 in cost of professional services was due to commission                costs of $22,963, $27,880 paid to a consulting firm for website                development, and higher salaries allocated to cost of professional                services of $31,371. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

| ·   | Cost                of hardware sales for the quarter ended June 30, 2008 increased to                $38,493                compared with $1,990 in 2007. Cost of hardware sales was directly                related                to the increase in hardware                sales. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Operating*
*      Expenses:*

|                                      |   | June                30, |    | Change |   |
|-------------------------------------------|--------|-------------------------|---------|--------|--------|
|                                      |   | 2008                    |    | 2007   |   | Amount |   |  % |   |
|                                      |   |                    |    |   |   |   |   |   |   |
| Sales                and marketing        |   | $                       | 56,624  |   | $      | 120,347 |   | $ | (63,723 | ) |   | (52.9 | ) |
| General                and administrative |   |                    | 360,810 |   |   | 313,715 |   |   | 47,095 |   |   | 15.0 |   |
| Amortization                              |   |                    | 175,468 |   |   | 189,747 |   |   | (14,279 | ) |   | (7.5 | ) |
| Depreciation                              |   |                    | 41,020  |   |   | 51,107 |   |   | (10,087 | ) |   | (19.7 | ) |
| Total                operating expenses   |   | $                       | 633,922 |   | $      | 674,916 |   | $ | (40,994 | ) |   | (6.1 | ) |

*Sales      and Marketing:*

| ·   | Sales                and marketing expenses for the quarter ended June 30, 2008 decreased                52.9%                to $56,624 compared with $120,347 in                2007. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                and marketing expenses as a percentage of total revenues decreased                to 4.9%                for the quarter ended June 30, 2008 compared with 12.4% for                2007. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                decrease in sales and marketing for the quarter ended June 30, 2008                is due                to lower salaries allocated of $29,822, a decrease in travel expenses                of                $22,177 and a decrease in trade show costs of                $10,000. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*General      and administrative:*

| ·   | General                and administrative expenses for the quarter ended June 30, 2008 increased                15.0% to $360,810 compared with $313,375 in 2007. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | General                and administrative expenses as a percentage of total revenue decreased                slightly to 31.2% for the quarter ended June 30, 2008, compared with                32.2%                in 2007. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in general and administrative expense of $47,095 was related                primarily to salaries. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

*Amortization:*

| ·   | Amortization                expense decreased 7.5% to $175,468 for the quarter ended June 30,                2008                from $189,747 in 2007. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Amortization                expense as a percentage of total revenue decreased to 15.2% for the                quarter ended June 30, 2008 compared with 19.5% in 2007. The decrease                in                the percentage of amortization expense is attributable primarily                to higher                overall revenues. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Depreciation:*

| ·   | Depreciation                expense decreased 19.7% to $41,020 for the quarter ended June 30,                2008                from $51,107 in 2007. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Depreciation                expense as a percentage of total revenue decreased to 3.6% for the                quarter                ended June 30, 2008 compared with 5.3% in 2007. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Other      Income (Expense):*

|                               |   | June                30, |    | Change |   |
|------------------------------------|--------|-------------------------|---------|--------|--------|
|                               |   | 2008                    |    | 2007   |   | Amount |   | % |   |
|                               |   |                    |    |   |   |   |   |   |   |
| Investment                income   |   | $                       | 4,160   |   | $      | 4,231 |   | $ | (71 | ) |   | (1.7 | ) |
| Interest                expense    |   |                    | (51,007 | )      |   | (69,329 | ) |   | 18,322 |   |   | (26.4 | ) |
| Total                other expense |   | $                       | (46,847 | )      | $      | (65,098 | ) | $ | 18,251 |   |   | (28.0 | ) |

*Investment      Income:*

| ·   | Investment                income decreased to $4,160 for the quarter ended June 30, 2008 from                $4,231. |
|--------------------|----------------------------------------------------------------------------------------------------------------------|

*Interest      Expense:*

|                                                  |   | Stated                     |   |         |   | Financing    |   | Total    |   |
|-------------------------------------------------------|--------|----------------------------|--------|--------------|--------|--------------|--------|----------|--------|
|                                                  |   | Interest                on |   | Discount     |   | Cost         |   | Interest |   |
|                                                  |   | Notes                      |   | Amortization |   | Amortization |   | Expense  |   |
|                                                  |   |                       |   |         |   |         |   |     |   |
| Capital                lease obligations              |   | $                          | 1,416  |         | $      | -            |   | $        | -      |   | $ | 1,416 |   |
| Long-term                promissory notes             |   |                       | 8,075  |         |   | -            |   |     | 10,947 |   |   | 19,022 |   |
| Notes                payable-stockholders             |   |                       | 13,897 |         |   | 13,326       |   |     | -      |   |   | 27,223 |   |
| Convertible                notes payable-stockholders |   |                       | 2,831  |         |   | -            |   |     | -      |   |   | 2,831 |   |
| Other                                                 |   |                       | -      |         |   | -            |   |     | 515    |   |   | 515 |   |
| Total                interest expense                 |   | $                          | 26,219 |         | $      | 13,326       |   | $        | 11,462 |   | $ | 51,007 |   |

|                                                  |   | Stated                     |   |         |   | Financing    |   | Total    |   |
|-------------------------------------------------------|--------|----------------------------|--------|--------------|--------|--------------|--------|----------|--------|
|                                                  |   | Interest                on |   | Discount     |   | Cost         |   | Interest |   |
|                                                  |   | Notes                      |   | Amortization |   | Amortization |   | Expense  |   |
|                                                  |   |                       |   |         |   |         |   |     |   |
| Line                of credit                         |   | $                          | 3,300  |         | $      | -            |   | $        | -      |   | $ | 3,300 |   |
| Capital                lease obligations              |   |                       | 3,600  |         |   | -            |   |     | -      |   |   | 3,600 |   |
| Long-term                promissory notes             |   |                       | 10,460 |         |   | -            |   |     | 13,785 |   |   | 24,245 |   |
| Notes                payable-stockholders             |   |                       | 17,705 |         |   | 16,781       |   |     | -      |   |   | 34,486 |   |
| Convertible                notes payable-stockholders |   |                       | 2,831  |         |   | -            |   |     | -      |   |   | 2,831 |   |
| Other                                                 |   |                       | -      |         |   | -            |   |     | 867    |   |   | 867 |   |
| Total                interest expense                 |   | $                          | 37,896 |         | $      | 16,781       |   | $        | 14,652 |   | $ | 69,329 |   |

*Provision      for Income Taxes:*

----

**Six      Months Ended June 30, 2008 Compared to Six Months Ended June 30,      2007**

*Revenue:*

|                                 |   | June                30, |      | Change |   |
|--------------------------------------|--------|-------------------------|-----------|--------|--------|
|                                 |   | 2008                    |      | 2007   |   | Amount |   |  % |   |
|                                 |   |                    |      |   |   |   |   |   |   |
| Software                             |   | $                       | 341,544   |   | $      | 314,675 |   | $ | 26,869 |   |   | 8.5 |   |
| Maintenance                          |   |                    | 1,511,868 |   |   | 1,277,393 |   |   | 234,475 |   |   | 18.4 |   |
| Professional                services |   |                    | 567,046   |   |   | 325,643 |   |   | 241,403 |   |   | 74.1 |   |
| Hardware                             |   |                    | 40,315    |   |   | 21,961 |   |   | 18,354 |   |   | 83.6 |   |
| Total                revenue         |   | $                       | 2,460,773 |   | $      | 1,939,672 |   | $ | 521,101 |   |   | 26.9 |   |

*Software:*

| ·   | Revenue                from software sales for the six months ended June 30, 2008 increased                8.5%                to $341,544 compared with $314,675 from the period ended June 30,                2007. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in software sales was primarily due to increases in sales                of                Petroware and iSynergy of $35,500 and $24,761, respectively, offset                by a                decrease in Integra upgrades of $23,293 and a decrease in sales of                our                database components of $4,365. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

| ·   | Maintenance                revenue for the six months ended June 30, 2008 increased 18.4% to                $1,511,868 compared with $1,277,393 in                2007. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Maintenance                revenue was impacted by increases in Petroware ASP, Integra, AS400,                and                AS400 ASP of $100,486, $93,557, $21,993, and $18,557,                respectively. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in maintenance revenue is primarily related to strong Petroware                ASP and Integra sales during the first quarter of 2007 and an increase                in                maintenance prices at the beginning of the third quarter of                2007. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

| ·   | Professional                services revenue for the six months ended June 30, 2008 increased                74.1% to                $567,046 compared with $325,643 for the same period last                year. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in professional services revenue of $241,403 included $219,464                for website design, data conversion and custom programming related                to a                large sale made to a customer during the fourth quarter of                2007. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

| ·   | Hardware                sales for the six months ended June 30, 2008 increased $18,354 to                $40,315                from $21,961 for the same period last year. Hardware sales for the                first                and second quarters of June 30, 2008 and 2007 were insignificant.                The                third and fourth quarters of our fiscal year are usually when hardware                sales are highest. Hardware sales can be very large in relation to                overall                sales of the Company and can impact our net income positively, but                the                Company’s profitability is not dependent on hardware                sales. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Cost      of Revenue:*

|                                 |   | June                30, |    | Change |   |
|--------------------------------------|--------|-------------------------|---------|--------|--------|
|                                 |   | 2008                    |    | 2007   |   | Amount |   | % |   |
|                                 |   |                    |    |   |   |   |   |   |   |
| Software                             |   | $                       | 77,352  |   | $      | 102,252 |   | $ | (24,900 | ) |   | (24.4 | ) |
| Maintenance                          |   |                    | 332,706 |   |   | 229,508 |   |   | 103,198 |   |   | 45.0 |   |
| Professional                services |   |                    | 217,956 |   |   | 109,793 |   |   | 108,163 |   |   | 98.5 |   |
| Hardware                             |   |                    | 44,283  |   |   | 18,918 |   |   | 25,365 |   |   | 134.1 |   |
| Total                cost of revenue |   | $                       | 672,297 |   | $      | 460,471 |   | $ | 211,826 |   |   | 46.0 |   |

*Software:*

| ·   | Cost                of software sales for the six months ended June 30, 2008 decreased                24.4%                to $77,352 compared with $102,252 for the six months ended June 30,                2007. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cost                of software as a percentage of the related revenue decreased to 22.6%                for                the six months ended June 30, 2008 from 32.5% in                2007. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cost                of software sales decreased $24,900 as a result of a decrease in                commission costs of $55,073 and a decrease in cost of sales of database                products of $10,314. Those decreases were offset by an increase in                the                cost of iSynergy sales (which is purchased from a vendor) of                $39,761. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

| ·   | Cost                of maintenance revenue for the six months ended June 30, 2008 increased                45.0% to $332,706 compared with $229,508 in                2007. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cost                of maintenance as a percentage of the related revenue increased to                22.0%                for the six months ended June 30, 2008 compared with 18.0% in                2007. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in cost of maintenance revenue of $103,198 included an increase                in salaries allocated of $89,646, commission costs of $17,242, software                maintenance that was pay to outside vendors of $16,788, offset by                a                decrease in our cost of database products of                $24,480. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

| ·   | Cost                of professional services for the six months ended June 30, 2008 increased                98.5% to $217,956 compared with $109,793 in                2007. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cost                of professional services as a percentage of the related revenue increased                to 38.4% for the six months ended June 30, 2008 compared with 33.7%                in                2007. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase of $108,163 in cost of professional services was due to                commission costs of $49,782, $42,015 paid to a consulting firm for                website                development and by salaries allocated to cost of professional services                of                $18,524. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

| ·   | Cost                of hardware sales for the six months ended June 30, 2008 increased                to                $44,283 compared with $18,918 in 2007. Cost of hardware sales was                directly                related to the increase in hardware                sales. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Operating      Expenses:*

|                                      |   | June                30, |      | Change |   |
|-------------------------------------------|--------|-------------------------|-----------|--------|--------|
|                                      |   | 2008                    |      | 2007   |   | Amount |   | % |   |
|                                      |   |                    |      |   |   |   |   |   |   |
| Sales                and marketing        |   | $                       | 138,559   |   | $      | 226,258 |   | $ | (87,699 | ) |   | (38.8 | ) |
| General                and administrative |   |                    | 758,927   |   |   | 624,253 |   |   | 134,674 |   |   | 21.6 |   |
| Amortization                              |   |                    | 350,937   |   |   | 379,495 |   |   | (28,558 | ) |   | (7.5 | ) |
| Depreciation                              |   |                    | 86,277    |   |   | 102,214 |   |   | (15,937 | ) |   | (15.6 | ) |
| Total                operating expenses   |   | $                       | 1,334,700 |   | $      | 1,332,220 |   | $ | 2,480 |   |   | 0.2 |   |

*Sales      and Marketing:*

| ·   | Sales                and marketing expenses for the six months ended June 30, 2008 decreased                38.8% to $138,559 compared with $226,258 in                2007. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Sales                and marketing expenses as a percentage of total revenues decreased                to 5.6%                for the six months ended June 30, 2008 compared with 11.7% for                2007. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                decrease in sales and marketing for the six months ended June 30,                2008 is                due to decreases in salaries allocated of $31,295, travel costs of                $30,799                and other marketing costs of                $18,599. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*General      and administrative:*

| ·   | General                and administrative expenses for the six months ended June 30, 2008                increased 21.6% to $758,927 compared with $624,253 in 2007. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | General                and administrative expenses as a percentage of total revenue decreased                to                30.8% for the six months ended June 30, 2008, compared with 32.2%                in 2007.                The decrease in the percentage of general and administrative expenses                as a                percentage of total revenue is related to higher overall total                revenue. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                increase in general and administrative expense of $134,674 was due                primarily to an increase in salaries of $93,556 and travel costs                of                $41,512. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Amortization:*

| ·   | Amortization                expense decreased 7.5% to $350,937 for the six months ended June                30, 2008                from $379,495 in 2007. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Amortization                expense as a percentage of total revenue decreased to 14.3% for the                six                months ended June 30, 2008 compared with 19.6% in 2007. The decrease                in                the percentage of amortization expense is attributable to higher                overall                revenues. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Depreciation:*

| ·   | Depreciation                expense decreased 15.6% to $86,277 for the six months ended June                30, 2008                from $102,214 in 2007. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Depreciation                expense as a percentage of total revenue decreased to 3.5% for the                six                months ended June 30, 2008 compared with 5.3% in                2007. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Other      Income (Expense):*

|                                                  |   | June                30, |     | Change |   |
|-------------------------------------------------------|--------|-------------------------|----------|--------|--------|
|                                                  |   | 2008                    |     | 2007   |   | Amount |   | % |   |
|                                                  |   |                    |     |   |   |   |   |   |   |
| Investment                income                      |   | $                       | 11,736   |   | $      | 8,463 |   | $ | 3,273 |   |   | 38.7 |   |
| Loss                on sales of marketable securities |   |                    | -        |   |   | (15 | ) |   | 15 |   |   | - |   |
| Interest                expense                       |   |                    | (105,078 | )      |   | (140,947 | ) |   | 35,869 |   |   | (25.4 | ) |
| Total                other expense                    |   | $                       | (93,342  | )      | $      | (132,499 | ) | $ | 39,157 |   |   | (29.6 | ) |

*Investment      Income:*

| ·   | Investment                income increased to $11,736 for the six months ended June 30, 2008                from                $8,463 because of higher invested                balances. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Interest      Expense:*

|                                                  |   | Stated                     |   |         |   | Financing    |   | Total    |   |
|-------------------------------------------------------|--------|----------------------------|--------|--------------|--------|--------------|--------|----------|--------|
|                                                  |   | Interest                on |   | Discount     |   | Cost         |   | Interest |   |
|                                                  |   | Notes                      |   | Amortization |   | Amortization |   | Expense  |   |
|                                                  |   |                       |   |         |   |         |   |     |   |
| Line                of credit                         |   | $                          | 116    |         | $      | -            |   | $        | -      |   | $ | 116 |   |
| Capital                lease obligations              |   |                       | 2,962  |         |   | -            |   |     | -      |   |   | 2,962 |   |
| Long-term                promissory notes             |   |                       | 16,378 |         |   | -            |   |     | 22,624 |   |   | 39,002 |   |
| Notes                payable-stockholders             |   |                       | 28,720 |         |   | 27,540       |   |     | -      |   |   | 56,260 |   |
| Convertible                notes payable-stockholders |   |                       | 5,662  |         |   | -            |   |     | -      |   |   | 5,662 |   |
| Other                                                 |   |                       | -      |         |   | -            |   |     | 1,076  |   |   | 1,076 |   |
| Total                interest expense                 |   | $                          | 53,838 |         | $      | 27,540       |   | $        | 23,700 |   | $ | 105,078 |   |

|                                                  |   |                       |   |         |   |         |   |     |   |
|-------------------------------------------------------|--------|----------------------------|--------|--------------|--------|--------------|--------|----------|--------|
|                                                  |   | Stated                     |   |         |   | Financing    |   | Total    |   |
|                                                  |   | Interest                on |   | Discount     |   | Cost         |   | Interest |   |
|                                                  |   | Notes                      |   | Amortization |   | Amortization |   | Expense  |   |
|                                                  |   |                       |   |         |   |         |   |     |   |
| Line                of credit                         |   | $                          | 6,564  |         | $      | -            |   | $        | -      |   | $ | 6,564 |   |
| Capital                lease obligations              |   |                       | 6,813  |         |   | -            |   |     | -      |   |   | 6,813 |   |
| Long-term                promissory notes             |   |                       | 21,146 |         |   | -            |   |     | 28,381 |   |   | 49,527 |   |
| Notes                payable-stockholders             |   |                       | 36,131 |         |   | 34,548       |   |     | -      |   |   | 70,679 |   |
| Convertible                notes payable-stockholders |   |                       | 5,631  |         |   | -            |   |     | -      |   |   | 5,631 |   |
| Other                                                 |   |                       | -      |         |   | -            |   |     | 1,733  |   |   | 1,733 |   |
| Total                interest expense                 |   | $                          | 76,285 |         | $      | 34,548       |   | $        | 30,114 |   | $ | 140,947 |   |

*Provision      for Income Taxes:*

----

*Liquidity      and Capital Resources*

*Cash*
*      flows from Operating Activities:*

*Cash      Flows from Investing Activities:*

*Cash*
*      Flows from Financing Activities:*

*Working*
*      Capital:*

----

**Item      4T. Controls and Procedures**

**PART      II. OTHER INFORMATION**

**Item      1.****Legal Proceedings**

**Item****2.**** ****Unregistered      Sales of Equity Securities and Use of Proceeds**

**Item      3. Defaults Upon Senior Securities**

**Item      4. Submission of Matters to a Vote of Security Holders**

**Item      5.**
**      Other Information**

**Item      6. Exhibits**

**a.      Exhibits**

| Exhibit No. |   | Description of Exhibits                                                      |
|------------------|--------|----------------------------------------------------------------------------------------|
| 31.1             |   | Section                302 Certification pursuant to Sarbanes-Oxley Act.               |
| 32.1             |   | Section                906 Certification pursuant to Sarbanes-Oxley                Act |

----

**S**
**ignatures**

|                                      | AVATAR                SYSTEMS, INC.                                                                          |
|-------------------------------------------|--------------------------------------------------------------------------------------------------------------|
|                                      |                                                                                                         |   |
| **Dated:                August 13, 2008** | By:                                                                                                          | /s/ROBERT                C. SHREVE |
|                                      | Robert                C. Shreve Chief                Executive OfficerChief                Financial Officer |

----